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Long-Term Care

As people approach retirement, their insurance needs often change. Whereas earlier they may have focused on life and disability insurance to replace wage income, the need for those types of insurance can diminish as their assets grow. Asset protection may become more important, and that is when people should consider long-term care insurance. Although long-term care (LTC) refers to a wide variety of services including medical care and non-medical care, the focus of a long-term care discussion should be on custodial care, as most long-term care falls under this category.

Custodial care provides assistance with the following Activities of Daily Living (ADL): bathing, dressing, eating, toileting, continence, and transferring, or when an individual has memory problems. Typically when an individual is unable to perform a certain number of the above-mentioned daily activities (typically two), or has memory problems, they are considered candidates for long-term care. This type of care does not usually require medically trained personnel.

Depending on the patient’s condition and financial situation there are three ways in which these services are paid for: out-of-pocket, Medicaid, and LTC insurance. Medicare does not pay for custodial care in most circumstances, nor does most private health insurance coverage. Medicaid can pay for custodial care costs, but eligibility for the program is subject to strict income and resource limits.

Long-Term Care Insurance

LTC Insurance is private insurance specifically designed to cover some or all of the custodial care expenses typically incurred while at home, in assisted living facilities, or in nursing homes. LTC Insurance comes in several policy types. Indemnity and Expense Incurred are the two most common. With both, you select a daily benefit level that you would like to cover (e.g., $100 per day). The indemnity policy pays you the daily benefit amount when you begin to receive long-term care services, whereas an expense-incurred policy provides reimbursement after the fact for eligible expenses incurred. Because it is easier to receive your benefits under an indemnity plan, clients typically prefer these policies.

The premium charged for a long-term care policy will depend on several factors including health, age, the level of benefits received, and the length of time benefits will be received. Regarding health, the insurers are typically more concerned with morbidity risk (i.e., the risk of getting sick), whereas with life insurance they are concerned with mortality risk (i.e., the risk of dying). Once the premium is established, it will generally not change unless there is a premium increase for an entire class of policyholders.

There are also deductible or elimination periods associated with LTC Insurance. This is the number of days that one must be receiving care before the policy will begin to pay benefits. These periods typically range anywhere between zero to 180 days, and the longer the elimination period the lower the premium will be.

LTC Insurance will generally require that a period of time pass before covering preexisting conditions. This means that coverage will be denied within the period set forth in the policy and care for a preexisting condition will have to be paid for out-of-pocket if one needs long term care before the period has lapsed. However, there are companies that will waive this condition if the insured fully discloses their medical history. Generally, there are also some mental and nervous system disorders not covered, along with alcoholism, drug abuse, and intentional self-inflicted injuries. Typically, people who are in reasonably good health, can take care of themselves, and are between the ages of 18 and 84, are eligible for LTC Insurance. The age limitations only apply to the time of purchasing a policy and benefits should be paid at any age as long as premiums have been paid.

Who Needs Long-Term Care

According to a study by the U.S. Department of Health and Human Services, it is estimated that at least 60% of Americans over the age of 65 will spend some time in a nursing home due to prolonged illness or disability, and more than half of the U.S. population will require LTC at some point in their lives. The statistics are strongly in favor of having some form of LTC coverage.

• 70% of people turning age 65 can expect to use some form of LTC during their lives¹
• Women need care longer (3.7 years) than men (2.2 years)¹
• One-third of today’s 65 year olds may never need LTC support, but 20% will need it for longer than five years¹

Long-Term Care Options

There are various options for where one can receive LTC depending on their abilities to carry out the activities of daily living.

Home Health Care

Home Health Care is one of the fastest growing segments in health care. The demand for these services has risen steeply as the length of hospital stays has been reduced, despite the need for ongoing recuperation. Home health care services can help keep a person with impaired functioning at home. Paid home health care may also be more flexible than nursing home care in meeting the particular needs of the LTC population. Certified home health care workers are typically required to provide this care, although certain policies are not as strict.

Assisted Living Facilities

Assisted Living Facilities and Independent Living facilities provide care for people who may not need the high supervision or medical care provided by a nursing home, but may not be suited to, or would prefer not to be living alone. These facilities offer an array of services to assist residents with their daily living needs, provide a social outlet and community involvement, and encourage them in remaining as independent as possible. Since there are many different services available to meet the residents' needs, they can also remain in their assisted living home during times of recuperation from illness or minor lapses in health.

Nursing Homes

Nursing Homes account for the greatest share of public and private spending on Long-Term Care. A nursing home is a residence that provides room, meals, recreational activities, help with daily living, and protective supervision to residents. Generally, nursing home residents have physical or mental impairments which keep them from living independently. Nursing homes are certified to provide different levels of care, from custodial (help with activities of daily living) to intermediate care (services such as physical therapy) to skilled care (medical services that can only be administered by a trained professional).

Cost of Long-Term Care

Based on information from the 2013 Genworth Cost of Care Survey², the average annual national cost of Long-Term Care is as follows:

Home Health Care:

• $18/hour for Homemaker Services (i.e., cooking, running errands, etc.)
• $19/hour for Non-Medicare Certified Home Health Aide Services (i.e., bathing, dressing, transferring, etc.)
• $3,707/month for Medicare Certified Home Health Aide Services (i.e., skilled care associated with a nurse visit in the home)

Assisted Living Facility:

• $3,450/month for a one bedroom facility

Nursing Home:

• $207/day for a semi-private room
• $230/day for a private room

Tips for Buying LTC Insurance

• Look for policies with at least one year of nursing home or home health care coverage, not coverage limited to just skilled care.
• Avoid purchasing a policy with a “service day” elimination period where only days when services are actually provided count towards the elimination period.
• Make sure the policy covers Alzheimer’s disease.
• An inflation protection option (rider) should be available which either automatically increases the benefit level or gives the option to increase the benefit level without providing evidence of insurability.
• The policy should guarantee that the coverage cannot be canceled, non-renewed, or terminated because you get older or your health deteriorates.
• Get a comparison quote and have a LTC Insurance specialist explain the differences in benefits and premiums between them. Avoid buying benefits you do not need.
• Research the company's experience in the market and their history of rate increases. Check the company's rating and avoid buying a policy just because it's the cheapest.
• Review the "Outline of Coverage" with a Long-Term Care insurance specialist to determine how the insurance company defines "facility" and what type of care is covered.
• Generally, the younger an individual purchases a long-term care policy, the cheaper the premiums will be.

Tax Treatment

There are various rules regarding the tax treatment of LTC insurance policies. Most of the policies currently in the market meet the federal standards regarding beneficial tax treatment. Individuals who itemize their deductions and spend more than 7.5% of their adjusted gross income on medical costs may deduct their premiums up to a certain amount based on age. The maximum deduction amounts for 2013 are:

• Age 40 or less, $360
• Age 41 through 50, $660
• Age 51 through 60, $1,360
• Age 61 through 70, $3,640
• Age 71 or older, $4,550

In addition, “C” Corporations that provide qualified LTC plans may deduct the full premiums paid as an ordinary business expense, including premiums for the employee’s spouse and dependents.

Self-employed individuals may deduct the cost of the premium without regard to the 7.5% floor, as the self-employed may now deduct from gross income 100% of amounts paid during the year for health insurance costs (including LTC insurance).

Hybrid LTC Insurance Products

Hybrid Insurance products that combine long-term care insurance with other forms of insurance are becoming increasingly more common. These products are attractive to individuals who are concerned that they will pay LTC insurance premiums for years and never receive benefits. There are many ways to obtain long-term care insurance through a hybrid product. One of the most common vehicles is a single premium life insurance/LTC policy. As an example, a policy may cost $100,000 upfront and provide up to $300,000 for long-term care with a $150,000 death benefit. The client’s $100,000 would be spent on long-term care needs first. If the original investment is drained any additional long-term care costs would reduce the death benefit. This option may be beneficial for someone who has the need for both life insurance and long-term care insurance and can afford to pay a large upfront cost. It is also potentially appealing because a LTC and life insurance hybrid product provides an individual’s heirs with a tax-free death benefit if the money isn’t used for long-term care. Additionally, some companies offer annuities and disability policies with long-term care riders or options. Hybrid long-term care policies may have more limited coverage than standard policies so the costs and coverage should be evaluated closely when comparing different vehicles. An insurance expert should also be consulted when weighing the risks and benefits of each product.

Long-Term Care Summary

LTC is a service that many people may need at some point in their lifetime. It is important to consider how one is prepared to pay for this service, especially with the rising costs of care. LTC Insurance is one tool in the financial planning process that may allow an individual to protect his/her assets and relieve the burden of paying for care from their family. Many individuals feel that if their net worth would allow them to pay for their coverage out-of-pocket that they need not consider a LTC insurance policy. However, even if that is the case there are significant reasons to consider such a policy, such as peace of mind and potentially preserving the assets you would have used to pay for your care. An individual should speak with their insurance expert to deem how much and what kind of LTC Insurance will best suit his/her future needs and concerns.

¹U.S. Department of Health and Human Services, Longtermcare.gov, August 2013.

²“Genworth 2013 Cost of Care Survey.” Genworth Financial, Inc., February 2013.